Estate planning isn’t anyone’s favorite topic of conversation, but the fact remains that it is one of critical importance. One option to consider as you do your planning is to create a trust.
Trusts have several general benefits, the chief of which is helping to avoid the costs, privacy concerns, and delays of probate court. Other benefits include the flexibility to place stipulations on how & when your assets are distributed, the ability to minimize gift and estate taxes, and in some cases, protection from lawsuits and creditors.
While trusts are an attractive choice, the different types can be confusing. Today I’d like to review three major types of trusts to help shed some light on which might be best for your estate.
Often referred to as a “Living Trust”
Very flexible option that gives the grantor a lot of control
Grantor usually serves as the trustee during his or her lifetime, though that is not required
Grantor appoints the successor trustee who manages the trust upon death or if the grantor becomes incapacitated
Offers the peace of mind to know that your assets will continue to be managed according to your wishes and best interests
Unlike other types, a revocable trust can be dissolved should the grantor so choose
Can be beneficial for those with property in multiple states, as it helps avoid ancillary probate proceedings.
Before opening a revocable trust, consider that it does require a lot of attention to detail. Additionally, assets in a living trust are still considered part of your estate and are treated and taxed as any other asset during your lifetime.
Transfers assets out of the grantor’s estate
Relieves grantor of tax liability on the income generated by said assets
Can help keep the assets out of probate
Can help avoid estate taxes.
Very useful option for federal estate tax planning
Often serves to exclude life insurance proceeds from the grantor’s taxable estate.
As its name implies, this type of trust is less flexible than a revocable trust. You cannot change the terms, dissolve, or regain control of the assets allocated to it once the trust is established. It requires the permission of the beneficiary and/or judicial authorities to change the terms or to be terminated.
Outlined in a will but not created until after death
Great fit for anyone who has modest assets during his or her lifetime, but anticipates a windfall from lawsuits or life insurance
Inexpensive to set up
Great for someone with several beneficiaries, as there is no penalty tax for beneficiaries if each one receives no more than $10,000 per year
Someone who plans to name a beneficiary who is mentally disabled can take comfort in the fact that this trust will ensure that person gets money to help, without them having to make important financial decisions
A testamentary trust offers a lot of freedom as far as who you can appoint as trustee. However, the trustee you name can decline the responsibility, after which the court can appoint anyone. Be sure your trustee is someone you can count on.
Regardless of what type of trust you choose, my office is here to help with its set-up or with any questions you might have. Both federal and state laws govern the various types of trusts, and selecting the best option is highly dependent on what types of assets you have. It’s important to know all the factors as you make these significant decisions for yourself or with your loved ones.